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At a time of unprecedented funding cuts, it’s no surprise that local authorities have welcomed the 40% audit fee reductions announced by the Audit Commission following the outsourcing of its in-house work and ongoing reductions in its central costs. Many also look forward to being able to appoint their external auditor in five years time, subject to the legislation announced in the Queen’s Speech.
While an audit change five years into the future is unlikely to be a top priority for those responsible for essential public services under huge financial pressure, the new framework due to be unveiled in a draft bill this summer brings opportunities as well as risks for local public services that continue to evolve.
In terms of opportunities, outsourcing does suggest that local public bodies will have a reasonable increase of choice of firms* with significant experience in their sector, which is not only good news for fees but also for quality. It is this focus on quality and value for money in particular that will increasingly come into play over the next five years, according to Gareth Davies, Head of Public Services at Mazars.
According to Davies, the changes are coming at a critical time for public services grappling with growing demand due to demographic changes and significant reductions in resources. “At its best, external audit is not only a source of assurance, it’s a trusted and independent sounding board for senior managers, councillors and non-executives navigating risky territory. External auditors with in-depth sector experience will know how others are tackling the same challenges. Combine this with their knowledge of the public body they are working with and it gives them a unique perspective,” says Davies.
This is even more important when the level of financial and operational risk is going up, as it is now. As Davies explains, public service leaders are having to manage cost reductions as they bring spending into line with resources available. In addition, they’re also looking for new ways to reduce demand on overstretched services, perhaps by preventative action or mobilising other sources of support.
Further sources of risk requiring the close attention of boards, managers and auditors are creeping into major structural changes currently underway in the NHS and policing.
As Davies points out, GPs are assuming much greater power in NHS commissioning decisions as part of the new clinical commissioning groups (CCGs) due to replace primary care trusts next year. “We are working with several of these emerging groups to help them think through their new role and how they can achieve the best possible health outcomes for local people, while managing the risks they face.”
A similar structural change is happening in policing, where elections to appoint police commissioners will take place later this year. Existing police authorities will be abolished and each elected police commissioner will work with the chief constable for the area to get the policing priorities established and monitor performance against them.
“Again, we are likely to see lots of governance implications. Role clarity will be vital so that the new arrangements have the best chance of improving results” explains Davies.
And while Davies believes that open competition between audit suppliers will bring benefits for clients, at the same time, the appointment of external auditors will demand stronger local governance and procurement arrangements.
“Taxpayers will want to see that the external auditor remains independent and able to report the facts without fear or favour. To address this, the government is proposing local independent panels to recommend audit appointments, and local public bodies will need to work through the relationship between this new panel and the existing audit committee,” he says.
Looking forward, public bodies will want to attract high quality and competitive bids from audit suppliers. This may be easier for some than others, depending on geography, size and risk. Much thinking is already underway among local authorities about the joint procurement of audit as one way of managing this.
In the meantime, Davies says local authorities can learn from other areas of public services, such as foundation trusts and education institutions that already have the freedom to appoint their own auditors. “By and large these arrangements are working well. In the case of foundation trusts, a key factor is securing an audit service that keeps pace with the changing shape of the trust’s activities and business plan.”
The fact that the change of audit regime coincides with a high risk time for public services makes this a demanding market, requiring real expertise in both public service management and private sector business improvement techniques.
“Providers that can get the blend right will be best placed to offer an attractive proposition to local authorities,” concludes Davies.
*Seven firms now provide external audit services to local government and the NHS for the next five years. These are Mazars, Ernst & Young, Grant Thornton, KPMG, Deloitte, PWC and PKF.